Freight density was one of the blessings of the mid 2000’s. The strong economy resulted in heavy volumes of freight. This allowed LTL carriers to run more direct schedules (from origin to destination) rather than move freight through break bulk terminals. Bypassing intermediate terminals means faster transit times, less handling, fewer miles driven, lower costs, less damages and less misloaded freight. Higher volumes of freight allow LTL carriers to be more selective in the type and quality of freight they handle and to increase yields.

During the same period, truckload carriers were in a good position to find backhaul loads, to run less empty and out of route miles and to keep their trucks and drivers moving. The freight recession followed by the economic downturn in late 2008, has forced many carriers to change business practices.

Despite encouraging words in recent days that the economy has hit bottom and is in the process of a turnaround, truck tonnage in the United States last month fell at its sharpest year-over-year rate yet in the economic downturn, plunging 13.6 percent based on data from the American Trucking Associations. According to Bob Costello, Chief Economist of the ATA, inventories relative to sales remain at high levels in much of the supply chain, especially in the manufacturing and wholesale industries. “Today, many new product orders can be fulfilled with current inventories, not new production, thus suppressing truck tonnage.”

This has placed pressure on trucking firms to adjust their strategies to bring them into line with the reduced freight volumes. In the case of the Roadway and Yellow divisions of YRCW, two of the largest U.S. based LTL carriers, the decision was made to integrate companies, to rationalize terminal networks and back office functions to purge costs. Other LTL carriers such as Con-Way and Vitran have also shuddered terminals to drive efficiencies. Based on their recently published second quarter results, all three carriers are experiencing big drops in revenue and earnings.

There are reports that some LTL carriers have stepped up their efforts to attract truckload traffic as a means of filling their trucks. Con-way recently announced that it has a new heavy volume LTL shipment pricing program in place to win back some of the business being lost to truckload carriers.

A recently-announced partnership between Milan Express, a Tennessee-based transportation services provider focusing on less-than-truckload (LTL), truckload, logistics, and warehousing, and New Century Transportation Inc. a New Jersey-based provider of LTL, regional and national truckload and temperature-controlled services, promises to offer shippers LTL services between the Midwest/Southeast region and the Northeast.

Dubbed the “Lightning Alliance,” officials at both companies said this partnership will feature world-class service between two of the country’s fastest-growing LTL carriers. David A. Kramer, president of Milan Express said the biggest benefit of the Lightning Alliance for existing Milan Express and New Century customers will be the ability to single-source more of their LTL needs through a primary regional provider they can count on. And he said that in addition to the convenience of being able to ship to a broader geography, the Lightning Alliance also provides very reliable and competitive 2-4 day transit times—depending upon the origin/destination—with the absolute minimal handling as a result of the Milan Express direct-load network working in tandem with the New Century Load-to-Deliver approach. “Minimal handling will result in error- and damage-free deliveries for our customers—all at a reasonable pricing,” noted Kramer. Time will tell if this strategy will take any market share from carriers that run these lanes direct.

As reported in a previous blog, some of the large national truckload carriers such as Werner and Schneider have been placing increased emphasis on regional truckload markets. These carriers are not abandoning the national markets but revising their long haul strategies. As an example, Werner, in its previous earnings report, noted that it “is deemphasizing the low asset return, solo driver solution” while seeking “to grow several other customer focused solutions for this market, such as using team drivers, engineered networks of relay trucks, third party brokerage carriers, power only with trucks provided by third party carriers and intermodal.”

Schneider National has also been rolling out its regional truckload business plan. On the heels of what the company said was the successful launch of a regional service in the West last January, the trucking company said it would offer regional service in the South-Central United States.

Just as LTL carriers are targeting truckload traffic, truckload carriers are going after large LTL shipments. Large LTL shipments are being defined as low as 2000 pounds and up. In addition, with fuel costs having dropped significantly as compared to the previous year, truckload carriers are going after loads that were converted to intermodal service. There are reports that shippers are more prepared to pay the small rate differential to enjoy the faster transit time associated with an over the road service.

For companies that cannot achieve the necessary density levels to sustain profitability, this is leading to trucks being parked, closures or sell-offs of businesses without the critical mass to remain profitable. As an example, Intermodal and logistics firm Pacer International, in order to stem steep losses, announced it will sell its heavy-haul Pacer Transport trucking business to Universal Truckload Services, the companies said last Monday. Universal's president and CEO, Don Cochran, said "we believe this acquisition will complement our truckload operations. We expect the asset-light business model to integrate nicely with our current operations and that we will be able to achieve efficiencies through this acquisition.”

What are the lessons of these changes for shippers? The next blog will address the potential impacts of these changes and outline some strategies that shippers should employ to protect the integrity of their freight programs.

The recession has caused many shippers to reduce production levels, integrate factories and/or warehouses and modify shipping patterns. Some trucking companies are experiencing declines of 20, 30 or even 40% in freight volumes. As a result, this is necessitating changes in their business operations.

The last blog focused on the impacts of these declining volumes on carriers. As outlined, this includes the integration of terminal networks, the closure of terminals, the parking of trucks, layoffs or shorter work weeks for line and staff employees and other defensive measures. Some carriers are also going on the offensive by forming marketing alliances, changing/expanding their geographic footprint and/or targeting new segments of business (e.g. heavy LTL shipments etc.).

This blog will examine the impacts of some of these changes in carrier strategies on shippers. It is important for shippers to be aware of these changes since they may have a direct impact on availability of equipment, on transit times and on how your freight is being handled. Here are some issues to consider and some questions to ask your core carriers.

Impacts of Carrier Strategies on Service

a) In view of the reduction in freight volumes, is your LTL carrier holding your freight an additional day or more to build better load factors?
b) Are they now moving your freight through a break bulk terminal or using an interline carrier?
c) Are you experiencing any increases in damages or misloaded freight?
d) Does your truckload carrier have enough equipment and drivers in its fleet to meet your ongoing needs?
e) If your company is now receiving a degraded level of service from one or more of its core carriers, can you obtain a higher level of service from the competition?
f) Is the competition truly able to provide a superior service?
g) As the rate of carrier bankruptcies begins to escalate, will any of your carriers be casualties?
h) Have you solid back up carriers in place on all of your shipping lanes?
i) Are you providing them with loads during the downturn so they will be there for you when one or more of your core carriers leave the market?
j) Will they have adequate truck capacity when the economy picks up?
k) Will your truckload carriers continue to provide LTL service as the recession comes to a close?
l) Will your LTL carriers continue to move your truckload traffic?

Impacts of Carrier Strategies on Rates

a) Are your freight rates in line with the service your company is receiving from its core carriers?
b) Are you aware of the current market level freight rates on all of your shipping lanes?
c) When was the last time you benchmarked your freight rates or conducted a freight RFP?
d) Will the low freight rates you are paying be sustained as the economic rebound begins to unfold?
e) While you have the leverage, is this the time to negotiate reduced freight rates with your carriers and lock them in for the next two or three years to protect your company from the inevitable rate increases and carrier failures?

Preparing for an Economic Recovery

Many economists are now saying that the economies of North America have hit bottom and we are on track for a recovery. In view of the high levels of unemployment and with many consumers having negative equity in their homes, the rebound is expected to be slow and bumpy. During an economic inflection, this is typically a period when some of the weaker carriers exit the market. This may be an opportune time to re-evaluate all aspects of your freight program to ensure your company is well positioned for the turnaround.

Cross-border trade using surface transportation (e.g. truck, rail, pipeline) between the United States, Canada and Mexico dropped 35.4 percent in May as compared to 2008 levels, the largest year-over-year decline on record for the North American Free Trade Agreement partners, according to the Bureau of Transportation Statistics of the U.S. Department of Transportation. Trade volumes declined for the eighth consecutive month. Imports from Canada and Mexico to the United States were down 38.1 percent in May 2009 from May 2008 while exports from the United States declined 32 percent. The value of North American surface trade dropped to $47.9 billion in the fifth consecutive month with a year-to-year decline of greater than 27 per cent.

Trucks carried 72.4 percent of the total. The value of imports carried by truck was 35.7 percent lower, while the value of exports carried by truck was 33.4 percent lower during this period.

U.S. – Mexico surface transportation trade totaled $18.6 billion in May, down 26 percent compared to May 2008. The value of imports carried by truck was 23.4 percent lower, while the value of exports carried by truck was 21.1 percent lower than in May a year ago.

Freight volumes in 2008 were down from the previous year as well. Traffic across the Ambassador Bridge, that links Detroit and Windsor, Ontario, the busiest border crossing, declined 15% in 2008 from the 2007 levels.

Although the July 2009 Ontario - U.S. truck traffic numbers remain lower than last year, the good news is that the month-to-month downward spiral throughout 2009 seems to have stopped. Recent numbers released by the Public Border Operators Association show that there 482,520 commercial truck crossings between Ontario and U.S. border states in July -- down nearly 25% from the same period in 2008, but relatively flat from June 2008 (483,450).

This blog will examine some of the forces at play with respect to NAFTA traffic to see if there is any reason for optimism.

Large Drops in Key Trade Sectors

There are two key business sectors that have been very hard hit. They are housing and automobile purchases. The severe downturn in new home purchases was compounded by the imposition by the U.S. of a 10 percent tariff on imports of softwood lumber products from Ontario, Quebec, Saskatchewan and Manitoba as a result of Canada’s alleged failure to comply with the Softwood Lumber Agreement. Softwood lumber is one of Canada’s largest exports to the U.S. representing $8.5 billion in 2005.

U.S. - Canada trade since 1965 has been dominated by auto parts and whole autos of US domestic brands and the recession combined with the massive disruption by the bankruptcies of GM Corp. and Chrysler Corp. has had a major impact on trade and sales. For many consumers, the purchase of an automobile can be deferred and has been deferred. The U.S. border states and Ontario, with their large auto and auto parts manufacturing industry layoffs, have been hardest hit.

There is some good news on both fronts. The release of the surprisingly strong Case-Shiller Price Index, compiled by Standard & Poor’s, followed earlier reports that sales of existing homes in the United States rose in June for the third consecutive time, while sales of new homes rose in June by the largest percentage in eight years. After a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover.

While retail sales in July were disappointing, auto sales grew by 2.4%. August sales are expected to be even better. The “Cash for Clunkers” car trade-in scheme which gives Americans up to $4500 (U.S.) to replace their old car with a new one appears to be gaining traction. Pressure is now building on Canada’s federal government to initiate a similar program.

The U.S. “Buy America” Policy

The US$787 billion stimulus package, signed into law by President Obama, includes the proviso that all iron, steel and manufactured goods for the “construction, alteration, maintenance or repair” of public infrastructure projects must be U.S. produced. There is evidence that some U.S. distributors are refusing to stock construction products due to a concern that they won’t get government contracts. While the NAFTA agreement is supposed to prevent this from happening, these obligations do not seem to have the same impact at the state and municipal levels. As a result, some Canadian companies are being blocked from gaining access to these Recovery Act funded projects. More “Buy America” provisions are expected to be inserted in future U.S. appropriation and authorization legislation in the months to come.

Meanwhile, at this week’s NAFTA Summit, President Obama seemed less enthusiastic about quelling Canadian anxiety over U.S. protectionist policies. The President downplayed the impact of “Buy America” and said it is an isolated issue that does not affect the majority of trade between Canada and the U.S. Prime Minister Harper will likely continue to press President Obama on this issue.

Surge in Canadian Dollar

The Canadian dollar drifted down below $.80 U.S. in March of 2009 and has rebounded to $0.91 - $0.93 range in recent days. This is hindering Canada’s export traffic to the U.S.

The Mexico Issues

Meanwhile, U.S. - Mexico trade has benefited from Mexico requiring imports from the U.S. for materials and mid-level components to complete major exports. Mexico has benefited from Texas' economy. The second-largest state economy in the U.S., the Texas economy was the strongest in the U.S. for the last six months, and among the latest to reflect the impact of the U.S. economic slowdown and national unemployment trends. Texas is Mexico's largest and strongest U.S. state trading partner.

However, under the North American Free Trade Agreement passed in 1993, the U.S. is required to open its border to Mexican and Canadian carriers who meet U.S. trucking standards. The Canadian border is open; the Mexican border is not. Yielding to pressure from the Teamsters union (who fear loss of jobs) and safety advocates (who fear unsafe Mexican trucks), the pilot program allowing Mexican-domiciled trucks to deliver freight in the United States was stopped last year in an overwhelming vote by the House that gave a resounding “no” to Mexican trucks. Soon after the program was eliminated, the Mexican government said it would place tariffs on roughly 90 American agricultural and manufactured exports as payback for the U.S. decision to shutter the program. These tariffs amount to $2.4 billion of American goods, ranging from fruit juices to pet food to deodorant, among others, ranging from 10 percent to 45 percent, with affected products coming from 40 states, according to a Los Angeles Times report from earlier this year.

A published Bloomberg report said that President Obama told President Calderon at this week’s NAFTA Summit that he is determined to resolve this ongoing dispute. Bloomberg said that Obama will also address safety concerns that have been raised by the U.S. Congress. Mexican President Felipe Calderon told Obama that this dispute has hurt trade, raised consumer costs, and reduced job creation, according to the Bloomberg report. He also added that removing restrictions preventing Mexican trucks from delivering goods across the border is a top concern.

Is a Turnaround in Sight?

There are some encouraging signs. As stated above, Ontario-U.S. cross-border volumes have stabilized over the past 2 months. There are positive signs on the housing, auto sales and unemployment fronts in the U.S. President Obama backed off campaign pledges to "amend" NAFTA and promised he would do what he could to re-launch the Mexican cross-border truck project. There were reports last month that a new trucking proposal has gone through the interagency channels and will be passed along to Capitol Hill for a vote.

The question is whether Canada’s high dollar and the U.S. “Buy America” program will offset some of the positive developments that appear to be under way. The three NAFTA countries will be studying the trade indices carefully over the coming months to see if a turnaround is taking shape or if we will continue to see a downward trend in NAFTA freight volumes.

Jeff Immelt, the CEO of General Electric has coined a term “the reset economy.” The term is meant to imply that “this economic recession is more than a simple business cycle correction, but is a permanent, fundamental change to how markets will operate and be influenced moving forward.... It’s an emotional, social, economic reset,” which will lead to greater government involvement in the economy and business affairs.

"I believe we are going through more than a cycle. The global economy, and capitalism, will be ‘reset’ in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner […] I think this environment presents an opportunity of a lifetime. We get a chance to reset the core of GE and focus on what we do best."

In essence the term suggests that companies should be using the recession to reposition their businesses for recovery. Business leaders are starting to use this term to describe the current environment and the road ahead. The core idea is that once we rebound from this economic downturn, the worst in 70 years, it will not be business as usual. We could emerge into a world where:

• The core growth rate is lower as cheap credit disappears and consumer spending does not fully rebound to pre-recession rates;
• The costs of regulation are significantly higher;
• The cost of capital is higher and the ability to apply financial leverage is greatly reduced;
• Global trade and offshore manufacturing shrinks, as attitudes become more nationalistic and defensive.

Many companies project long term demand using a historical growth line. When a recession occurs, they reduce growth rates, project how long they think the recession will last, and then reapply the historical growth curve on the other side of the recession. However, the business environment might be far different moving forward than it has been historically, not just during the recession, but potentially for a decade or more following it. What does the Reset Economy mean for Shippers and Carriers?

Shipper Strategies for a Reset Economy

• The starting point is to determine what to produce and at what price point. This demands a fundamental reassessment of a company’s customer requirements, core competencies, cost structures and its source of competitive differentiation.

• Each company must make a careful determination of which business segments or customers have been lost permanently, which ones have been lost temporarily, which ones will remain at post recession levels and grow at a slower rate than the past and which new business segments will emerge.

In the August 19 issue of the Toronto Globe & Mail there is an article about a San Diego based 4 star luxury hotel that has fundamentally changed its business model to address the new realities. As an example, they now offer a $19 (U.S.) hotel room that comes with no bed, toilet paper, towels, air-conditioning or “honour bar” and a single light in the bathroom for safety. The next level up adds in a bed (without sheets), for $39 a night. For a bed plus toiletries and toilet paper, the rate is $59 a night. Clearly this is “out of the box” thinking targeting the many families that are on tight budgets, are fearful of losing their jobs or have lost jobs but are trying to take some “R and R’ time with their families. The point is that many companies will have to change their paradigms to bring their business model in line with the realities of 2009 and beyond.

• Closely aligned with this is a careful assessment of where the demand will come from and where the sources of supply can come from. Demand may not bounce all the way back after the recession ends. While economic forecasts have not always been that accurate, it may be valuable for companies to conduct some market research or secure economic forecasting data about future demand levels.

• Demographic and category market share data may also useful, not just whether the whole category or market will shrink or grow, but whether that specific shipper is gaining or losing market share in particular market segments. If demand bounces back, while that shipper’s market share is down, the company might not realize that. A company can potentially recover lost market share with the right pricing and marketing strategies.

• Supply chain strategic planning and risk management will become more important than ever as companies seek to adopt “lean” approaches. Network optimization and inventory analysis tools will play a strong role in helping the supply chain organization perform the necessary analysis and drive out excess costs and inefficiencies. Many companies will need to work with consulting organizations to do this type of analysis.

• Organizations with Integrated Business Planning processes – i.e., rolling quarterly budgets that are connected to monthly Sales and Operations Planning processes – will be better equipped to accommodate a changing macro environment.

• The focus on cost savings and value should be a boon for shippers that invest in best in class RFP, E-sourcing and spend analysis tools to drive all excess costs out of their supply chains.

• As demand increases, the tight capacity will place upward pressure on freight rates. This will make the task of optimizing the value of each company’s freight expenditures that much more important.

Carrier Strategies for a Reset Economy

• The core problem for asset based carriers will be matching capacity to projected demand over a strategic planning time horizon.

• Each trucking company must make an assessment of which markets (e.g. cross border versus domestic, national versus regional) and services (e.g. LTL, "heavy" LTL, truckload, expedited) have growth potential, where their fleet can operate in a profitable manner, which markets should they abandon or reduce their commitment to and how quickly should they be bringing back capacity.

• Just as a hotel is offering $19 hotel room for the sleeping bag crowd, truckers need to be talking to their clients and discerning the trends in their market. This could open up opportunities for low cost operators that can provide various levels of basic transportation services at affordable prices.

• It also suggests that carriers should be part of the solution by employing analytical tools to help their clients identify alternate modes of transport, pool points, continuous move and round trip opportunities, possibly in combination with other clients. This is the added value that shippers will be looking for to keep their costs low.

• With tepid demand expected for the next several years, it suggests that carriers must plan for a slow uphill climb with innovation, thoughtful planning and attention to detail more than ever before.

• As the pendulum turns, albeit slowly, carriers need to regain pricing discipline, to better utilize freight costing tools, and look for opportunities where they can migrate freight rates to more profit sustaining levels.

• Despite the less than stellar results in the trucking industry, one can expect an upswing in mergers and acquisitions as companies seek to restore critical mass.

Some companies will emerge from the recession stronger than ever. Crises create opportunities: to overcome cultural resistance; to slash structural costs that are out of line; and to build supply chain agility and flexibility. They incent companies that create the ability to compete in a far wider range of economic scenarios and market configurations. General Electric, Siemens, Wal-Mart and Proctor & Gamble are among the leading edge companies that are “resetting” their companies for the “new economy.” Paul Laudicina, chairman of A.T. Kearney stated it this way in the current issue of Business Week, “The most important thing any company could or should be doing now to prepare for the post-recession environment is to look at all of the fundamentals and re-examine what changes in the theory of business might mean for their core competencies, for their ability to meet the new customer demand.”

As a youngster growing up, I had the pleasure watching two of baseball’s greatest players, Dizzy Dean and Pee Wee Reese, provide the play by play description of the televised weekend ball games. They did a wonderful job. One of Dizzy Dean’s favourite expressions was “Oh, those bases on balls.” As a former star pitcher, Dizzy would often lament the damage done to baseball teams when they would walk opposing batters who would subsequently come home to score on a hit or walk later that inning.

In freight transportation there is a similar problem. Oh, those inbound freight costs. Many companies don’t manage and control these expenses. Instead, they let these costs get away from them. I often hear shippers say, these freight costs are paid for by their vendors. Often this is only partially true. Ultimately the purchaser of inbound materials is paying the freight as part of the landed cost of the goods. In a recent post, David DiSanto of DiSanto & Associates points out that “when you leave shipping choices up to your vendors, you really have no control over the inflow of your goods and materials, which can lead to production delays, stock shortages, late deliveries, unhappy customers, and higher costs for your company.”

One of the other familiar refrains I hear is that inbound freight is managed by Purchasing, a different silo with a different reporting structure. The company’s Transportation department has no say in the management of these costs. Again, while this may be true, it does not excuse the company from managing this important expense item. Ultimately both transportation and purchasing report to the same CEO.

What some companies don’t realize is that other companies manage these costs as a profit centre. One company’s inbound freight is another company’s outbound freight. The outbound shipper that is supplying the goods often negotiates effectively with their carriers and applies a mark-up on the freight. The unsuspecting inbound receiver is paying more than if they had negotiated the freight rates themselves.

Of course, that is only one of the missed opportunities for shippers that neglect their inbound freight. Since inbound traffic can represent a significant volume for some companies, there is often an opportunity to leverage both inbound and outbound freight to create,

• inbound consolidations; and/or
• inbound milk runs by combining freight from multiple vendors at the most appropriate consolidation point; and/or
• round trips; and/or
• continuous moves;

all of which can result in reduced freight expenses. As DiSantos points out, “You are the customer and you have the right to determine the freight terms and shipping arrangements that are best for you. Evaluation should be performed on your current terms and arrangements, your shipment volumes, and your alternatives to determine the purchasing terms that are best for your company. Remember…’leverage’ is the key term to optimize your distribution network.”

The effective management of inbound freight begins with a sound business strategy and logistics strategy. The strategy focuses on creating the optimum network design. This implies the careful planning of customer service requirements, plant and warehouse locations. It also encompasses the thoughtful selection of vendors based on location, costs, production times, transit times, inventory turnover levels, quality control issues and reverse logistics requirements. It includes consideration of the opportunities to use a company’s private fleet versus common carrier. Specifically, to what extent can inbound loads be matched to outbound loads to maximize private fleet utilization? How successfully can empty miles be kept to a minimum?

I would like to thank David DiSanto of DiSanto & Associates, whose posting on another blog inspired me to write this blog this week.